AUSTRALIANS approaching retirement are being urged to consider alternatives to reverse mortgages, after an Australian Securities and Investments Commission review found many borrowers were using them without understanding the risks.
ASIC spokesman Michael Saadat said a reverse mortgage could affect aged care access later in life.
“If consumers borrow too much at the beginning, the effect of compound interest and uncertain property prices means there is a risk they end up with insufficient equity or none at all,” Mr Saadat said.
Reverse mortgages work by allowing homeowners to borrow money using the equity in their home as security. The loan can be an upfront lump sum, a regular income stream or a line of credit and is paid back in full when the home is sold, including fees and interest accumulated (1 to 2 per cent higher than normal mortgages).
“Really, it’s about your needs and whether you need a lump sum upfront. If you don’t, the best way to do is through a drawdown on a line of credit,” Mr Saadat said, adding there were a range of other options out there.
“The main alternative is the (Federal Government’s) pension loan scheme. It lets you top up your pension, paid as a fortnightly income stream,” he said. “It accrues as a loan, paid back to the government when you pass away. Last year they decided to expand it so you can increase the pension by up to 150 per cent, but it requires you to be eligible for the aged pension.”
Downsizing was another option, which Mr Saadat said may not appeal to everyone.
“There are also products that allow you to unlock the equity in your future, by selling a share of your home for an upfront price,” he said.